/Europe: Trade war begins with US – Rabobank | by Sandeep Kanihama | FXStreet

Europe: Trade war begins with US – Rabobank | by Sandeep Kanihama | FXStreet

Analysts at Rabobank point out that in a classic tit-for-tat scenario, yesterday the EU answered Trump’s call for tariffs on steel and aluminum imports with import tariffs of its own. Key Quotes “The EU is said to be working on import tariffs of 25% on iconic American goods such as motorcycles, jeans and bourbon, collectively worth USD 3.5bln. The proposed measures (which will be discussed today by the European Commission) seem to be strategically targeted to “hurt” key Republican US states such as Kentucky, San Francisco and Wisconsin. The latter is, for example, where Harley Davidsons are made and where Republican Speaker of the House Paul Ryan is from. However, we wonder how much of a deterrent such tariffs will be for the US. Over the past 3 years, US exports to the EU28 have averaged USD 276bln per year, meaning that the proposed measures only affect a little over 1% of US exports to the EU.” “Indeed, Trump does not seem to be backing down (despite domestic backlash). Paul Ryan has already spoken out firmly against US tariffs, while Trump’s top economic advisor Gary Cohn has resigned because of this issue. Although Trump most recently said that he might lift tariffs on allies (including the EU) if “they can do something for us”, he has also indicated that he is considering to curb imports from China and Chinese investments in the US.” “The situation is not without precedent. In 2002, George W. Bush also wanted to implement import tariffs on steel, which were called off after the European Commission threatened with retaliatory tariffs. That is one scenario. Another is that after tax “reforms”, Trump is now eyeing another major win for the “forgotten people of America”, namely his protectionist trade policy. We hope for the former, but market participants would be wise to, at least, prepare for the latter. In the meantime, S&P500 futures point to a drop of about 1%, while the Yen and Euro are strengthening, possibly due to safe have demand.” “The market reaction is understandable. As an indication of the consequences of trade tariff increases, our economists Hugo Erken, Maartje Wijffelaars and Philip Marey estimated that if the US would impose a 20% import tariff on all imports and other countries retaliate, the cumulative missed GDP growth until 2021 in the US could be 6% (and 3% for the Eurozone).”